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Wednesday, April 4, 2012

We have identified a possible large declining leading diagonal that we have labelled as wave "1" down in Wheat. The leading diagonal was completed in December 2011.

Since then a wave "2" (marked in blue colour) counter trend rally has been in progress. Wave "a" and "b" of wave "2" are complete and wave "c" marked in black colour is in the early stages. This set the stage for an interesting opportunity to trade this commodity. See the daily chart of Wheat under.

This is also a possible a Reverse Head & Shoulder pattern with a target of 780 on the index. A breakout from the neckline (with a close higher then 680 on the index) would confirm the pattern.

Positive divergence on the Money Flow Index is developing indicating improving liquidity in this commodity. Also notice that the volume within the H&S bottom meet the requirements specified by Schabacker, Edwards and Magee, with the heaviest volume on the right shoulder.

The Wheat/Corn spread dating back several decades is at an extreme. Wheat is at an all time low against Corn.

We recommend that you wait for the "breakout" from the neckline if you want to trade the pattern. Use the neckline to control your risk with a stop just under this area on the index.

Remember that in the bigger picture the leading diagonal means the larger trend is down. The above is just a trade that should be closed when the target is reached.